The mechanic of default

Note kindly translated by Anne-Marie de Grazia

The logic of a possible Greek default in regard to the IMF and its creditors must be understood. We are recalling here of some of its elements.

Technical constraints.

The risk of a default concerns today first of all the IMF loans which amount to a total of around 25 billion euros. These loans have been granted by the IMF following salvage plans implemented between 2010 and 2012. The repayments are scheduled as follow (over the coming weeks):

  1. First, an amount of 308 million euros due on June 5th.
  2. Then, another amount of 347 million euros due on June 12th.
  3. Another payment of 578 million euros will have to be made on June 16th.
  4. Finally, a last payment of 347 million euros will be due on June 19th.

These four payments are to be made over the coming three weeks. They amount to a total amount of 1.6 billion euros. But one must know that the loans of the IMF are drawn up in Special Drawing Rights (SDR aka XDR), which is a unit of account made up of a basket of currencies and functioning as a potential reserve currency ever since the agreements of the 1960s[1]. The value of repayments varies in fact with the exchange rate between the Euro and the SDRs. It must be added that the IMF is a priority creditor which accepts neither delays nor renegotiations nor annulments of its credits. The Greek government, by « scraping the bottom » of some drawers might conceivably be able to meet the first or the second of these payments. But the probability of it going beyond this is now scant indeed. However, Greece might ask the IMF for a technical payment delay of 14 days. This explains that sometimes June 5th is mentioned, sometimes June 19th. But this option seems now excluded by the Greek government itself.

The consequences of a default and the role of the European Central Bank.

If Greece is considered in default in relation to the IMF, it means that all the Treasury bonds emitted by the Greek government and held by different organisms will cease having a value from a legal accounting point of view. In fact, all financial practitioners know that part of the debt will be paid back in the end within the framework of a « reconciliation » with the defaulting country. But a default always results in a considerable loss in value of the State bonds concerned, of between 50% and 80%. In fact, of a total debt of 315.5 billion euros, we must remember that 141.8 billion are held by the European Financial Stability Facility (ESFS), 52.9 billion in bilateral loans with Eurozone countries, 27 billion are held by the European Central Bank and 25 billion by the IMF. In other words, over 70% of the Greek debt is held by European public actors, or assimilated.

The European Central Bank (ECB) holds Greek Treasuries but above all, it finances Greek banks through a mechanism called Emergency Liquidity Assistance or ELA. Through this mechanism, the ECB refinances Greek banks by accepting Greek Treasury bonds held by these banks as collateral. One can immediately see the problem if these Greek Treasury bonds must be considered as « valueless » by the ECB following a default. Very concretely, it means that the ECB could put a stop to the ELA and even ask for the reimbursement of the credits granted to the Greek banks. But even if it is content with merely stopping the ELA, the situation of Greek banks, which must presently face a haemorrhaging of deposits, will very rapidly, quasi from one day to the next, become untenable. In fact, the Greek banks are at the present time very dependent on the ECB and the latter has used this mechanism to try to strangle the new government which came out of the elections of January 25th. Its behaviour is very telling about the absence of democracy and even the hatred within European institutions of any really democratic government.

If the ECB suspends the ELA, there will very probably occur a bank run. The Greek government will then be forced to nationalize (even temporarily) some banks and will have to declare “banking hollidays” until the situation clarifies itself. There will also arise the need to establish a control of capitals, on the model of what was done for Cyprus in 2013. However, one must know that the suspension of the ELA will be perceived in Athens as the equivalent of an expulsion of Greece out of the Eurozone, in short, as equivalent to an open declaration of war (the Greek leaders knowing full well that the Eurogroup and the ECB are waging a muffled, but merciless war against them since January 25th).

It is however probable that the Greek government has already established a plan with technical as well political measures in answer to this situation. The suspension of the ELA will therefore provoke a grave crisis between Greece and the countries of the Eurogroup.

The way out of the Euro.

The consequences of a default and of a suspension of the ELA must then be considered. The Greek government would find itself faced with a penury of liquidities (in Euro) and a banking system which it will need to salvage. Two options are offering themselves. It can decide to requisition the Central Bank of Greece and force it to emit Euros. But this option is clearly in violation of the Treaty instituting the Economic and Monetary Union. It is not likely, for essentially political reasons, that the Greek government will come down to this. More probably, it will seek to bring the responsibility for an exit from the Euro to bear on Germany and on the Eurogroup. The second option, which is now the most probable, is that the Greek government will emit payment certificates, by way of the Ministry of Finances. These payment certificates would be destined to the payment of pensions and of the salaries of government employees, but also to the stabilization of the banks. They would be drawn up in Euros. The Greek government would guarantee that they will be “legal tenders” in Greece. Physical or moral persons could therefore pay their taxes in payment certificates and the latter would be used for any day-to-day current payments. This is a solution which has already been openly considered and which is inspired by what was done in Argentina at the beginning of the 2000s. But, very rapidly, an exchange rate would show up between the “true” euros and the payment certificates. Greek shop-owners and companies would accept these payment certificates only on condition of a more or less considerable reduction in value in relation to the “true” euros. Moreover, the payments certificates would rapidly oust the « true » euros in the normal monetary circulation (the famous « Gresham’s Law » [2]).

This situation of a cohabitation between two currencies, the Euro and the payment certificates, would be very unstable. It could only last a few weeks. One will either have to return to the Euro (and the ECB will have to resume the ELA), or have the Greek government taking over the control of the Central Bank of Greece, assuring the financing conditions of the certificates of payment, and renaming them “Drachmas.”

We can now understand that a Greek default, accompanied by a suspension of the ELA mechanisms and the emission of payment certificates would usher in almost irreversibly an exit of Greece from the Euro. Of course, if such a situation lasted only a few days, it would always be possible to back-pedal. But after two or three weeks, this might prove impossible. In this case, Greece would not repay its debt to the European institutions and to the States of the Eurozone. The Greek government will then agree to a “reconciliation” with its creditors only on condition of an annulment of 80% of the amounts. The shock to the European financial system will certainly be considerable, but mostly for psychological reasons. The purported « taboo » of the irreversible and indissoluble nature of the Euro regaling so-called experts such as Jean Peyrelevade[3] will have been broken. Investors from countries not belonging to the Eurozone will liquidate the positions which they are holding in peripheral countries (Spain, Portugal, Ireland and maybe Italy), whether these positions are in state bonds (so-called sovereign debt) or in private bonds (called corporate). It is probable then that other countries would progressively leave the Euro, especially those where, as in Italy, the debate is already widely open.


[1] This is explained in Sapir J., « La fin de l’Après-Guerre ? », note published on Russeurope, on April 28 2015,

[2] Mundell R., « Uses and Abuses of Gresham’s Law in the History of Money », Zagreb Journal of Economics, Volume 2, No. 2, 1998.

[3] See


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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